Home Equity Loan Prepayment Penalties

Some home equity loans have fees for early repayment

Fact checked by Vikki Velasquez
Reviewed by Doretha Clemon

When you take out a home equity loan, you typically agree to borrow money at a fixed interest rate over a fixed period of time. This gives both you and your lender certainty about how much you will pay for the loan. However, if you enjoy a sudden windfall, you may want to pay back your home equity loan early.

In that case, you may face home equity loan prepayment penalties. These are fees you could be charged if you pay off the home equity loan early and they vary a lot by lender. To avoid prepayment fees, discuss your options with your lender before you sign any agreements. You might realize that it makes more sense to take out a home equity line of credit if you expect you might pay the loan off early.

Key Takeaways

• Some home equity loans have early repayment penalties, which are fees charged if you pay back your loan earlier than expected. 
• Your lender determines whether your loan has these penalties and how much they are. 
• Make sure you read your loan agreement when taking out a home equity loan and talk to your lender if you are unsure about early repayment penalties. 
• If you expect to pay back your loan within a short period of time, it might make more financial sense to apply for a home equity line of credit.

How Home Equity Loan Prepayment Penalties Work

Home equity loans can be a relatively low-cost way to borrow money. Because you put your house up as collateral for this type of loan, they are very low-risk for lenders, who can consequently offer low interest rates. However, home equity loans can have associated fees: origination fees, appraisal fees, and application fees, among others. Fees vary by lender and many try to attract customers by offering low-fee loans.

Prepayment penalties are often overlooked when borrowers shop for a home equity loan because they are less imminent than what you pay when you get the loan. However, early payment penalties can be steep and it’s important to know if your loan has these penalties, especially if you plan on paying it off early.

For instance, if you intend to use your loan for home improvements before selling your home, a home equity loan might still be active when you sell and you may have to pay a penalty when you repay the loan at the close of your house sale.

The prepayment penalties associated with these loans vary a lot by lender. Some lenders impose steep fees, some may have little to no fees, while others only charge a fee if you pay back the loan within a few years of taking it out. If you are unsure which of these applies to your loan, be sure to check your loan agreement or ask your lender to clarify the fees they charge.

Important

You don’t need a mortgage to get a home equity loan as long as you meet the eligibility requirements. Being mortgage-free means you have more equity available to you so you may be able to borrow more money if you qualify.

Alternatives to a Home Equity Loan

There are a number of ways to avoid home equity loan early repayment fees. The most direct is to choose a lender that doesn’t impose these fees or at least one that doesn’t after the first few years of your loan. This is especially important if you plan on paying the loan back early.

A second option is to take out a home equity line of credit (HELOC) rather than a home equity loan. HELOCs may also come with early closure penalties, but you will normally only pay interest on the money you borrow against the line of credit.

This means that if you pay back what you’ve borrowed early—that is, reduce the balance of your credit to zero—you won’t pay any interest. You can then leave the HELOC to come to the end of its term and then close it without penalties.

If you already have a home equity loan with prepayment penalties and want to pay it back early, you have a calculation to make. Some loans impose a set fee for early repayment, while others have a fee equivalent to a (hopefully small) percentage of the total loan. Sometimes, these fees may mean it costs more to repay the loan early than to let it run its course.

Will I Have Any Issues Paying Off a Home Equity Loan Early?

That depends on your lender. Some lenders charge prepayment penalties if you pay off your home equity loan before the end of the agreement. This may be a fixed amount or a percentage of the balance owing. Others may not charge any fees at all. It’s always a good idea to verify whether fees apply by reviewing your loan agreement or checking with your lender.

How Much Are Home Equity Loan Early Repayment Penalties?

The prepayment penalties can vary depending on the lender. It’s always a good idea to check your loan agreement and review the terms.

How Can I Avoid Home Equity Loan Early Repayment Penalties?

There are several ways of doing this. You can look for a home equity loan with low repayment penalties, or take out a home equity line of credit (HELOC) instead. HELOCS generally have lower early repayment costs than regular home equity loans but also have variable interest rates.

The Bottom Line

Some home equity loans have early repayment penalties. These are fees you will be charged if you pay back your loan earlier than expected. Whether your loan has these penalties and how much they are will depend on your lender. 

Make sure you read your loan agreement when taking out a home equity loan and talk to your lender if you are unsure about early repayment penalties. If you expect to pay back your loan quickly, it might make more financial sense to apply for a home equity line of credit (HELOC).